Preserving Income Through Stimulus And Housing Tax Credit

It’s been a busy session for Congress: Last week the Senate approved a $15,000 tax credit for all homeowners, regardless of income. This week, as the House and Senate finish their negotiations, it’s been shrunk to an $8,000 tax credit for first-time home buyers who qualify under income guidelines.

That’s better than the $7,500 tax credit that was passed last fall. And the way the new stimulus package is written, you won’t have to pay the tax credit back in $500 increments over 15 years. In fact, the home buyer would get the $8,000 credit and without a payback requirement.

The world of stimulus, investment, Wall Street and the credit markets is moving so fast, it’s tough for a weekly columnist to keep up.

But in this week’s version, considered by many to be its final form, the $789 billion stimulus package aims to give taxpayers some additional help by providing a payroll tax credit of $400 for low- and middle-income workers, ($800 for couples), expansion of the child tax credit, expansion of the Earned Income Tax Credit, further relief of the marriage penalty, incentives for buying new cars (including light trucks and SUVs), and relief of the alternative minimum tax (AMT) that would have snared as many as 26 million taxpayers in 2009.

(Will the tax plan change before it’s signed? Maybe. Until the Senate and the House vote on the Stimulus Bill and it’s signed by the President, anything can change.)

Will it work? That depends on what the problem is that you’re trying to fix.

I’ve long felt that there is both a serious financial component and an emotional component to the current crisis. Fixing the financial failings of Wall Street and Main Street won’t necessarily cure the crisis of confidence and trust that lingers.

It isn’t just that Americans don’t trust the high-paid bankers on Wall Street. It’s that they no longer trust themselves to make smart, long-term decisions for their family’s future. They are second-guessing the most basic financial moves they’ve made. Consider three letters that recently arrived in my in-box:

Letter 1: A single mom in California used a 40-year loan to stretch her finances and buy a house for $500,000 that’s now worth $350,000. She’s paying her bills but wonders whether she’s possibly made the dumbest move of her life.

Letter 2: A divorced woman wonders if she made her own dumbest move by asking for the house based on its valuation when she divorced in 2005 — rather than getting half of her ex-husband’s pension. The house is worth 30 percent less — if she can even sell it.

Letter 3: A husband and father wonders whether he’ll ever climb out of the hole his family has fallen into, now that he has lost his job and is on the verge of losing his house to foreclosure. He is contemplating a life of not even qualifying to rent a house in his neighborhood of choice, not because he can’t afford it, but because he doesn’t know who would want to rent a home to someone with his credit score.

These three individuals, the families they’re connected to and the thousands of other Americans who write to me each week are all wondering what money moves they should be making right now. Should they stay in their homes or sell? Should they buy or rent? Should they keep contributing to their 401(k) plans at work, or contribute to a Roth IRA, or keep it in their mattress at home? (I’m not a big fan of stuffing your mattress with money, due to the risk of fire and flood. Safe deposit boxes are better — you’ll be safe even if the bank goes under.)

It’s becoming clearer that the mantra on Capitol Hill to “Do something, anything” is the call of people desperate to help, but who are unsure whether the help will actually solve the problem.

A few things are clear: If people have jobs, they’ll pay their mortgage, taxes, and other bills. If they don’t, they’ll choose food and fuel over a mortgage payment or credit card bill every day of the week. If they can’t afford to pay for COBRA after being laid off, they won’t carry health insurance. And if they get sick, they’ll head for the emergency room — and perhaps after that bankruptcy court.

But with our self-esteem tied up so closely with our net worth, you almost want to see Oprah lead a class on how to reprogram financial trust back into our lives. Because if you don’t have faith that the next 10 years in this country will be better than the last, it’s a big leap from there to buying a house and sinking roots into a community.